Managed Services supplier Playbook – Currency Risk

One of the newer trends that came about as the dollar has weakened in the last few years is the prevalence of currency adjustment clauses in contracts with a remote / offshore component. These are typically buried in some appendix along with CPI adjustments (which are a nuisance in their own right) and expose buyers to unforeseen currency risk that suppliers are much better equipped to handle.

So, do you know how much a rupee is worth in US$? If you missed this trick play from the outsourcing supplier, get ready for it to become an area of top concern around budget crunch-time next year. If the contract’s signing authority was at the CFO level, you may at least know how to hedge the risk. If you’re in IT, it’s just a pain.

The below graph shows how your bill for a “constant rate” would look with an Indian rupee currency adjustment included over the last 10 years. There is an upside — if you signed at the right time (2008), your costs could go down by 20% in a year. But if you time it wrong, your bill can go up by the same amount or more. If we see a return to 2008 rates, buyers who signed a $10M outsourcing contract with this provision in 2009 will be paying $12.6M.

A true multinational like an offshore outsourcer usually knows the costs of hedging currency risk. The best thing for them to do is to buy the appropriate financial instrument and build the cost into your ongoing rates. You get cost certainty, they get protection against having to pay their staff in real money if the US turns into the Weimar Republic in terms of currency strength. That’s a win-win. The win-WIN for you is to get that clause waived altogether.

Alex Veytsel is a Principal Analyst at RampRate where he is the lead architect of business and financial analysis models. Alex can be reached at alex.veytsel@ramprate.com

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